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Family Dollar's Lost Way Leads Levine into Hands of Peltz, Icahn

Updated from Wednesday, July 9, with Family Dollar's fiscal third-quarter earnings and sales and fourth-quarter forecast, which were released early Thursday.

NEW YORK (TheStreet) -- "[W]e lost our way,... [W]e lost our core focus."

That was the confession of Family Dollar(FDO - Get Report) CEO Howard Levine at an investor conference in late April. Roughly one month later, Carl Icahn disclosed he'd taken an over 9% stake in Family Dollar's shares and wanted the company put up for sale.

Family Dollar's crisis is profound enough that Levine, son of founder Leon Levine, may soon be ousted from the discount retailer, which has been family-run for more than a half century as the company expanded from a single Charlotte, N.C.-based storefront in 1959 to over 8,000 locations nationwide as of 2013. He has already fought for control with other large hedge funds, but Icahn presents Levine's biggest challenge yet.

To retain his grip on Family Dollar, Levine will quickly need to figure out how to reverse the company's declining sales and tumbling profits. Levine will also have to begin closing a wide performance gap between Family Dollar and its closest competitor, Dollar General(DG - Get Report). Stockholders may need to see evidence of significant progress on both of those fronts in the next 12-months.

Levine has pulled off similar feats in his many decades at Family Dollar, a tenure that includes nearly 16-years as CEO. After a tumultuous spell working under his father in the 1980s that culminated with a public split between the two, Levine returned to Family Dollar in the mid-1990s to head its merchandising efforts and pulled the company from a bout of underperformance and into an era of unprecedented expansion.

Levine dealt with WalMart's(WMT - Get Report) encroachment on Family Dollar's turf through its Neighborhood Market store concept and the rise of e-commerce during his first years as CEO. In a single decade running Family Dollar, he managed to grow the discount retailer through the most pronounced boom-and-bust economic cycle since the 1920s.

Family Dollar nearly tripled it stores and increased revenue and profits more than fourfold since Levine took over from his father in August 1998. The company's shares have more than tripled the return of the S&P 500 Index during Levine's tenure.

Today, however, Levine may be no match for the challenges facing Family Dollar and it is unclear how much longer he can count on the support of his board.

In what has become a familiar scenario, a powerful set of hedge fund investors including Icahn and Nelson Peltz of Trian Management now stand ready to pounce at the first sign of further financial missteps. Already Icahn has supplanted Levine as the company's largest shareholder, after exercising about $600 million worth of option contracts on July 2.

Activist hedge funds have used their growing clout to take on companies as large as Apple(AAPL), Procter & Gamble(PG), Microsoft(MSFT), Pepsico(PEP) and Walgreens(WAG), in recent years. They've also instigated dramatic change at Hess(HES), Kraft Foods(KRFT), Fortune Brands(FBHS), Motorola(MSI), Yahoo!(YHOO) and Safeway(SWY).

In light of those conquests, Family Dollar could be the next chapter in a hostile battle between Wall Street and Main Street corporations.

Earnings continue to drop at Family Dollar. The company posted fiscal third-quarter earnings on Thursday of $81.1 million, or 71 cents a share, down over 30% from a year earlier and missing Wall Street forecasts.

Third-quarter revenue rose 3.3% to $2.66 billion; analysts were looking for sales of $2.61 billion. Same-store sales fell for a third straight quarter, down 1.8%. Family Dollar expects flat same-store sales in the coming quarter.

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